Princeton Dispute Has Implications for Many Charities

Several disputes in the lawsuit over the Robertson Foundation touch on issues of governance that affect many nonprofit organizations.

William Robertson, his two sisters, and another relative are suing Princeton University, saying that the

university has not adhered to the terms of a gift the siblings’ parents made in 1961 to endow the graduate programs at the Woodrow Wilson School of Public and International Affairs. The gift established a supporting organization to Princeton, known as the Robertson Foundation, with a mission of training graduate students to work in the federal government, particularly in foreign affairs.

Under the document that established the Robertson Foundation, Princeton was given effective control of the foundation with four of the seven board seats. The Robertsons had argued in a pretrial motion that the Princeton-appointed members of the Robertson Foundation board have a conflict of interest any time they conduct business, such as approving spending decisions, because they are also trustees or officers of Princeton.

But Princeton’s lawyers say that the Internal Revenue Code requires that the supported organization, Princeton, control the supporting organization, the Robertson Foundation. That’s the main reason why Princeton has a majority of the board seats on the foundation, they say.

More than 44,000 supporting organizations exist in the United States. Donors receive greater tax benefits when they give to a supporting organization, which must be controlled by a public charity, than if they create a separate foundation because the perceived risk of abuse is lesser with supporting organizations than with private foundations.

Last month, Judge Neil H. Shuster agreed with Princeton that there is no inherent conflict of interest in the supporting-organization model.

“So long as the course of action taken by the fiduciaries [the university-appointed trustees] is consistent with the foundation’s mission, the foundation benefits to an equal degree,” he wrote. “In such instances, it can hardly be said that the university receives a benefit to the exclusion and detriment of the foundation.

Douglas S. Eakeley, the lead lawyer for Princeton, says Judge Shuster “has affirmed the law and regulations that have given rise not only to the Robertson Foundation but also to more than 44,000 other supporting organizations nationwide.”

Interest and Dividends

The Robertsons also tried to limit spending from the Robertson Foundation to interest and dividends. The foundation adhered to that standard for the first three decades of its existence, but it began spending capital gains in 1992, after the board gave consensus approval to the change, according to Princeton.

Princeton officials argued that the Robertsons wanted to abandon current policy so that they could hoard assets in the event they were able to persuade the judge in the case to give them control over the foundation’s money.

Ronald H. Malone, the Robertsons’ lawyer, says the Robertsons wanted spending restricted because they believe Princeton began directing increasing amounts of funds to projects unrelated to the Robertson Foundation mission when it began spending capital gains in 1992.

“Once they were able to ignore the dividends and interest restriction, the lid really came off the cookie jar,” Mr. Malone says.

Princeton officials say the 1992 change didn’t affect what they spent money on.

Last month, Judge Shuster sided with Princeton, and said that the certificate of incorporation permits spending realized gains: “The ability to spend realized gains under [the certificate] is clear and unambiguous.”

‘A Surplus’

The Robertsons have also suggested that Princeton has a surplus of funds for operating the graduate programs at the Wilson school, and that the excess should be used to support other programs that conform to the Robertson Foundation mission.

“If you cannot practicably spend all of this money on 165 graduate students, the court can take what it regards to be a surplus and devote it to purposes as close as possible to what the donor specified,” Mr. Malone says. “Then it’s up to the judge to decide if control of the surplus goes to Princeton or to Mr. Robertson to give to other universities to support government service.”

But Princeton’s lawyers argue that the legal concept the plaintiffs are citing, known as cy pres, may only be invoked to modify the terms of a gift when a court determines that it has become “illegal, impracticable, or impossible” to satisfy a gift’s original purpose.

Princeton argues that it has plenty of current and future uses for the Robertson Foundation money. It points to a new program it started this spring called Scholars in the Nation’s Service, which provides scholarships, salary, and education to exceptional college juniors who agree to work for two years in the federal government before returning to the Wilson school for a graduate degree.

Judge Shuster decided to wait until after the trial to tackle to the question of whether cy pres could be applied to this case. “It would be imprudent of the court to make such a finding without first making ultimate findings of fact,” he wrote.